Data centers: Empowering a data-driven world

January 19, 2023 | 7 min read

Jeff Menz

Managing Director, Portfolio Management

Casey Miller

Managing Director, Portfolio Management

At-a-glance—The data center opportunity:

Accelerating demand: Structural shift in how consumers and corporates use data powered by Internet of Things (IoT), Infrastructure as a Service (Iaas), e-commerce, and gaming.
Limited supply: Data center vacancy rate at lowest point ever in the U.S.; Rising land prices, longer lead-times for power and equipment, and increased labor costs all are driving up construction costs; Hyperscale users are competing for key locations
Compelling investment opportunity: Low correlations to other assets, a favorable risk/return profile, and new liquidity from institutional capital make data centers a portfolio component worth considering
High barriers to entry: Given the highly specialized and niche nature of the data center industry, experience is critical to successful execution—development, leasing, technical expertise, ESG, etc.

Data centers have become critical components of our growing dependence on technology. Surging demand coupled with high barriers to entry for new supply and a global search for attractive investment returns have brought the sector to center stage.

Big data keeps getting bigger. And faster. And more valuable. The amount of digital data expected to be created over the next five years will be more than double the amount of data created since digital storage was first invented in 1956.¹ By 2030, the number of internet-connected devices is expected to grow by 242% compared to 2019.² Data centers are not only real estate, they are the infrastructure lifeblood of the modern economy.

Processing, housing, streaming, and securing all this data has led to rapidly increasing demand for data centers. In fact, even though leased data center capacity has more than tripled since 2015³, vacancy is at an all-time low. Given the growing awareness of the significance of data centers to the economy, investors are increasingly looking for ways to participate.

The elements that appeal most to investors today include:

High demand for quality data center space—but limited supply of data centers able to keep pace with exponential data growth from developments in outsourcing, cloud adoption, and emerging technologies.
Long-term leases and credit-worthy tenants have led to a stable cash flow and attractive returns in both up and down markets.
Access to a specialized product type to diversify their portfolio.

Private data center investing requires a high degree of specialization to source, build, and lease the properties. With a favorable risk-adjusted return profile, high barriers to entry, and past resiliency in both up and down markets, we believe data centers represent an attractive long-term investment opportunity.

The demand for data centers

Data centers are the engines that propel the modern economy, as more and more systems become driven by some form of data. They’ve become the cornerstone of the information economy—the central nervous system of the interconnected internet network, further propelled by the COVID-19 pandemic which made everyday tasks from working to shopping completely dependent on data and fast connectivity. While data storage was once the primary purpose of data centers, computing power and network connectivity matter even more today. Digital technologies have transformed numerous aspects of society and the economy. Work, education, banking, healthcare, and shopping are a few examples of activities that individuals and businesses now perform online. Globally, ambitious digital mandates are underway to strengthen and expand digital data capabilities, including enhancing business usage of cloud technology, digitalizing public services, and extending 5G capabilities.

Exhibit 1 shows that the amount of digital data created in 2025 will be nearly ten times the amount of data created in 2015. The adoption of new technologies including personal devices and smart everything, in conjunction with the growing penetration of internet in developing markets are the main drivers behind this exponential growth. IDC, a global market intelligence provider, estimates that the volume of data in the world will pass 180 zettabytes by 2025. For reference, a single zettabyte is equivalent to one sextillion bytes, or a one followed by 21 zeros, enough data to fill 250 billion DVDs. Put simply, that’s a lot of data that will drive significant investments in storage infrastructure.

Exhibit 1: Volume of data generated vs. storage capacity

Bar chart showing volume of data generated vs. storage capacity from 2010 to 2025 (projected)

IDC 2022.

Data centers are attractive in that they occupy physical infrastructure space but are also vital to the virtual infrastructure on which modern society depends. It is an asset class that sits at the intersection of infrastructure and real estate. Tenant demand for existing space continues to increase, with hyperscalers—the largest cloud computing providers—driving near-record demand. Hyperscalers continue to aggressively expand their operations to accommodate end users’ needs, including social media, entertainment, gaming, and cloud services. Absorption of space has accelerated in most key markets, particularly in the largest data center clusters as shown in Exhibit 2.

Exhibit 2: Demand for data centers continues to accelerate
Net absorption by key market through 3Q 2022, megawatts (MW)

Bar chart showing net absorption by key market from 2021 to 3Q 2022 in megawatts

datacenterHawk, Principal Real Estate, 3Q 2022.

Demand is far outpacing supply

Growing demand has not been satisfied by the supply side, due in part to power grid limits imposed by local government. While rental growth slowed for a period of time, more recently the industry has seen a return to strong rental growth. Record low vacancy rates in key markets and accelerating demand have shifted the balance of pricing power toward landlords. We anticipate that this shift will result in higher rates and contract escalations going forward. This is important as data center tenants are not immune to many of the same concerns such as rising energy prices, supply chain issues, and labor shortages that are prevalent in other property sectors. Given the lack of supply, hyperscale users are having to compete for key locations and there are limited options for enterprise requirements.

Exhibit 3: Market size and vacancy rate

Line graph of commissioned power vs. vacancy from 2015 to Q3 2022

datacenterHawk, September 2022.

Structural demand is driving investment opportunities

Data centers present a unique opportunity for real estate investors. With growth and defensive attributes, the data center industry has proven resilient in both economic downturns and periods of economic expansion. Low correlations to other assets, a favorable risk/return profile, and new liquidity from institutional capital make data centers a portfolio component worth considering. Longer leases, many times in excess of 10 years, also make data centers attractive giving investors exposure to cash flows from high-quality credit tenants at higher yields than most other property types.

For long-term investors—particularly those aiming to fund obligations by matching income and liabilities— stabilized data centers may offer some inflation mitigation—an attractive benefit given today’s inflationary environment. Further, while sourcing opportunities in growth sectors during economic uncertainty is challenging, data centers are among the few areas where the structural growth story is intact.

The options to gain investment exposure to the data center sector are scarce due to limited offerings—core investments rarely trade and the pool of highly-technical developers who have capacity to build hyperscale datacenters is thin.

Investors who are able to partner with a strong developer may potentially achieve both an enhanced return and continued access to this sector, which is primed to further strengthen due to a number of factors, including the continued supply and demand imbalance, tenant preference to do repeat business with existing developers, increased headwinds to procure suitable sites with necessary power and fiber, and the long lead time on equipment necessary to commission a data center. All of these aspects point to the valuable opportunity in the develop and lease-to-core strategy, which we believe will prove advantageous for both tenants and investors going forward.

Attributes to focus on

While the technology supported by data centers has advanced rapidly, from a real estate perspective, most of the important requirements have remained unchanged. We believe key attributes of these assets include:

Location: As with all real estate investing, location is critical. The ideal data center location offers:

Dependable access to low-cost power
Proximity to a large population
Fiber connectivity
Low risk of natural disasters
Sales tax incentives

Given the importance of these criteria, a handful of markets have emerged as more dominant than others, including: Northern Virginia, Dallas, Northern California, Phoenix, Chicago, Portland, Atlanta, and Austin/San Antonio.

Facility: Because these assets host critical applications, they’re constructed with zero tolerance for downtime. They must offer multiple layers of protection, including:

Structurally enhanced walls, floors, and roofs
Multiple sources of power from multiple substations, as well as backup power through generators
Temperature- and humidity- controlled environment with air handler components
Controlled access with 24x7 security, mantraps, and biometric screening

Importance of experience in execution

Given the highly specialized and niche nature of the data center industry, we believe experience and access are critical to successful execution. As an active commercial real estate investor for more than 60 years⁴— including more than 14 years in the data center sector—we have witnessed the asset class evolve and adapt to the changing needs of occupiers. Our experience has resulted in a favorable track record and meaningful industry relationships:

A top-10 global real estate manager with a fully integrated real estate platform.⁵
Over 440 total development and value-add projects since 2001, valued at nearly $25.1 billion. Invested more than $2 billion in 20 data center transactions.⁶
Our substantial equity and debt business gives us a distinct perspective of real estate and capital markets.
In-house expertise in responsible property investing and ESG - data centers have many unique development, operational, maintenance, security, and energy requirements.
Demonstrated ability to source and close significant volume of high-quality investments.⁷
Able to source experienced partners that bring significant technical and location-specific expertise, as well as ability to attract strong tenants.

¹ BusinessWire, Data Creation and Replication Will Grow at a Faster Rate Than Installed Storage Capacity, March 24, 2021; IBM.
² Statista, July 2022.
³ datacenterHawk, September 2022.
⁴ Principal Real Estate Investors became registered with the SEC in November 1999. Activities noted prior to this date were conducted beginning with the real estate investment management area of Principal Life Insurance Company and, later, Principal Capital Real Estate Investors, LLC, the predecessor of Principal Global Investors Real Estate.
⁵ Managers ranked by total worldwide real estate assets (net of leverage, including contributions committed or received, but not yet invested; REOCs are included with equity; REIT securities are excluded), as of 30 June 2022. “The Largest Real Estate Investment Managers,” Pensions & Investments, 3 October 2022.
⁶ Based on gross asset value as of 31 December 2022.
⁷ Past performance is not indicative of future results and should not be relied upon to make an investment decision.

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"These Terms & Conditions explain certain legal and regulatory conditions and restrictions in relation to the Principal Global Investors (Europe) Limited website, and in relation to the Principal Global Investors Funds (‘the Funds’). This information may be changed by Principal Global Investors at any time without notice.

In these terms and conditions, references to 'Principal Global Investors' means Principal Global Investors (Europe) Limited or any affiliate of the Principal Financial Group, Inc. or Principal Global Investors, LLC.

Before you proceed, you must acknowledge that you have read, and agree to, our terms and conditions.

Information in relation to the Principal Global Investors Funds is available through this web site to institutional investors resident in the following countries of: Belgium, France, Finland, Germany, Guernsey, Ireland, Italy, Jersey, Netherlands, Spain, Sweden, Switzerland and the United Kingdom. By proceeding this far you are representing and warranting that you are an institutional investor resident in one of these countries. Not all of the Funds are available in all these jurisdictions, and investors are directed to the Country Registration document for detailed information. What follows is not an offer or invitation to acquire an investment to, and should therefore not be relied upon by, any person anywhere other than the countries noted. Persons in respect of whom such prohibitions apply must not access this web site. This web site is reserved exclusively for non-U.S. persons and should not be accessed by any person in the United States.

Yes, I certify to be an institutional investor and resident of a country listed above.

Cookies
Use of cookies on this site is outlined in the Privacy and Security Policy. In accepting these terms and conditions, you accept the terms of the Cookie Policy and the use of cookies from this site.

Legal Entity Disclosure and Regulation
In Europe by Principal Global Investors (Ireland) Limited, 70 Sir John Rogerson’s Quay, Dublin 2, D02 R296, Ireland. Principal Global Investors (Ireland) Limited is regulated by the Central Bank of Ireland.

In the United Kingdom by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London, EC2V 7 JB, registered in England, No. 03819986, which is authorised and regulated by the Financial Conduct Authority (“FCA”).

In Switzerland by Principal Global Investors (Switzerland) GmbH. This website is considered as advertising and information contained herewith be treated as such. Investors can obtain free of charge the prospectus, trust deed, the prospectus, the key investor information document (KIID), and the annual and semi-annual reports from the representative in Switzerland.

In Europe and United Kingdom, this website is directed exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients (all as defined by the MiFID and FCA respectively). If you are viewing the material as a retail investor, you should seek independent investment advice before deciding whether the products and services in question are suitable to meet your investment needs and objectives, as the language has not been complied to a retail client standard.

Principal Global Investors Funds
Principal Global Investors (Ireland) Limited is the issuer of the Funds. Investments may only be made on an application form attached to a current prospectus and following receipt by the investor of the KIID in respect of the Fund in which they intend to invest. The latest version of the prospectus of the Funds is dated 14 December 2012.

For Real estate investors in the European Economic Area (“EEA”), this website and the information on it is only directed at persons who are professional investors for the purposes of the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”), professional clients or eligible counterparties for the purposes of the Markets in Financial Instruments Directive (Directive 2014/65/EU) (“MiFID II”) or as otherwise defined under applicable local law and regulation and at whom this website and the information on it may lawfully be directed in any relevant jurisdiction (“Eligible Persons”). In relation to each member state of the EEA (“Member State”) which has implemented AIFMD (and for which transitional arrangements are not/ no longer available), this website may only be accessed and interests in Funds may only be offered or placed in a Member State to the extent that: (i) the relevant Fund is permitted to be marketed to professional investors in the relevant Member State in accordance with AIFMD (as implemented into the local law/regulation of the relevant Member State); or (ii) this website and its information may otherwise be lawfully distributed and the interests in Funds may otherwise be lawfully offered or placed in that Member State (including at the initiative of the investor). In relation to each Member State of the EEA which, at the date of accessing this website, has not implemented AIFMD, this information may only be distributed and interests in Funds may only be offered or placed to the extent that this information may be lawfully distributed and the interests in Funds may lawfully be offered or placed in that Member State (including at the initiative of the investor).

Persons who are not Eligible Persons, including but not limited to those individuals or other persons who fall within the FCA’s definition of ‘retail clients’, should not use or rely upon this website or the information contained therein and may not engage the services of Principal Real Estate or any of its affiliates, or invest in any Fund. Potential investors are advised that all or most of the protections provided by the UK regulatory system will not apply and that the UK Financial Services Compensation Scheme may not be available in relation to an investment in a Fund or separate account.

The contents of this website have not been verified or approved by any competent regulatory or supervisory authority. No liability, whether in negligence or otherwise, arising directly or indirectly from the use of the information or any part of it on this website is accepted and no representation, warranty or undertaking, whether express or implied, is or will be made at any time by Principal Real Estate or its affiliates or any of their respective advisers, directors, officers, employees, representatives or other agents (“Principal Agents”) for any information or any of the opinions contained herein or for any errors, omissions or misstatements.

None of Principal Real Estate or its affiliates or any Principal Agents makes or has been authorised to make any representation or warranties, whether express or implied, in relation to Principal Real Estate or regarding the truth, accuracy or completeness of any of the information contained on this website at any time. No representation or warranty is given by Principal Real Estate, its affiliates or the Principal Agents as to the achievement or reasonableness of, and no reliance should be placed on any projections, targets, estimates or forecasts contained in the information on this website. Furthermore, nothing contained on this website is or should be relied on as a promise or representation as to the future. No reliance may be placed by any person for any purpose whatsoever on the information or opinions contained on this website or on its completeness, accuracy or fairness at any time.

Principal Global Investors (Europe) Limited is not authorised by the FCA to directly deal with retail investors; any distribution of the Fund to retail investors in Europe is facilitated by fund distributors with which Principal Global Investors (Europe) Limited has entered distribution arrangements, pursuant to advice provided to investors by those distributors, based on the documents Principal Global Investors (Europe) Limited provides. Retail investors should not be provided with access to this website.

The name of the Swiss representative is ACOLIN Fund Services AG, Stadelhoferstrasse 18, CH-8001 Zürich. The name of the Swiss paying agent is Banque Cantonale de Genève, 17, quai de l’Ile, 1204 Geneva. Investors can obtain the prospectus, trust deed, the simplified prospectuses and the annual and semi-annual reports free of charge from the representative in Switzerland.
The value of units and the income from them may fall as well as rise.

Investments in the Funds are neither insured nor guaranteed by the US Government or the Federal Deposit Insurance Corporation and are not deposits or obligations of, or guaranteed by, Principal Global Investors.

No Solicitation
Nothing contained in this website shall constitute an offer or solicitation, in relation to units in the Funds or generally, in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised.

In particular, shares issued by the Company, and units in the Funds, have not been and will not be registered under the United States Securities Act of 1933 as amended or the securities laws of any state or political subdivision of the United States and may not, except in a transaction which does not violate US securities laws, be directly offered or sold in the United States or to any US Person. The Company will not be registered under the United States Investment Company Act of 1940 as amended.

This website is reserved exclusively for non-US persons and should not be accessed by any person in the United States.

No Investment Advice
The information in this website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such nor should it be construed as specific investment advice, an opinion or recommendation. The general information it contains does not take account of any investor’s investment objectives, particular needs or financial situation, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision.

You should also inform yourself as to (a) the possible tax consequences, (b) the legal requirements and (c) any foreign exchange restrictions or exchange control requirements which you might encounter under the laws of the countries of your citizenship, residence or domicile and which might be relevant to any investment, including the subscription, holding, transfer or disposal of units in the Funds

Delegation of Investment Management to Affiliates

Products upon which composite results contained in this material, if any, are based may not themselves be available in the United Kingdom and certain other jurisdictions; however, the underlying investment management capability can be made available to institutional investors subject to all applicable local regulations and restrictions. In connection with its management of client portfolios, PGIE may delegate management authority to affiliates that are not authorised and regulated by the Financial Conduct Authority. In any such case, the client may not benefit from all protections afforded by rules and regulations enacted under the Financial Services and Markets Act 2000.

Disclaimer
The information on this website is given by Principal Global Investors in good faith and has been derived from sources believed to be reliable and accurate as at their date. However, Principal Global Investors makes no representation or warranty of any kind for the accuracy or completeness of the information and it is under no obligation to update or correct any errors in the information after the date of publication. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

Subject to applicable law, Principal Global Investors and its affiliates and their respective directors, employees and associates do not accept any responsibility arising in any way (including by reason of negligence) for errors in, or omissions from, the information and do not accept any liability for any loss or damage, however caused, as a result of any person relying on any information on the website or being unable to access the website.

The Internet is not a totally reliable and secure medium of communication. Principal Global Investors accepts no liability for the security or confidentiality of information transmitted in this way and any such transmission of information shall be at your own risk.

The entire content of this website is subject to copyright with all rights reserved. You may not copy, reproduce, distribute or modify the content of this website without the prior written permission of Principal Global Investors.

No instructions for investment purposes will be accepted directly from this website or by e-mail.

If you accept these terms and conditions, click “Accept.”

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You may view, download for caching purposes only, and print content from the website for your own personal use, subject to the restrictions set out below and elsewhere in these Terms of Use.

No Guarantee of Timeliness
This website may contain videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions. The information and materials contained on this website, and the terms, conditions, and descriptions that appear, are subject to change. All content on this website is presented only as of the date published or indicated, and may be superseded by subsequent market events or for other reasons. In addition, you are responsible for setting the cache settings on your browser to ensure you are receiving the most recent data.

No Warranties
The information on this website has been developed internally and/or obtained from sources believed to be reliable; however Principal Global Investors and its affiliates do not independently verify or guarantee its accuracy or validity. The information and services provided on this website are provided ""AS IS"" and without warranties of any kind, either expressed or implied. To the fullest extent permissible pursuant to applicable law, Principal Global Investors disclaims all warranties, including, but not limited to, any warranty of non-infringement of third-party rights and any implied warranties of merchantability and fitness for a particular purpose. Principal Global Investors does not warrant, either expressly or impliedly, the accuracy or completeness of the information, text, graphics, links or other items contained on this website and does not warrant that the functions contained in this website will be uninterrupted or error-free, that defects will be corrected, or that the website will be free of viruses or other harmful components. Principal Global Investors expressly disclaims all liability for errors and omissions in the materials on this website and for the use or interpretation by others of information contained on the website. Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions on this website.

If you have questions, please email us.

Click ""Accept"" to indicate your acknowledgement and acceptance of Principal Global Investors Terms of Use and to continue."

This website contains general information only on investment matters and nothing in this website is intended to constitute or form part of any offer or inducement to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Information in this website is not directed at you if we are prohibited by any law of any jurisdiction from making the information on this site available to you and is not intended for any use that would be contrary to local law or regulation. Products or services mentioned on this site are subject to legal and regulatory requirements in applicable jurisdictions and may not be available in all jurisdictions. Accordingly, persons are required to inform themselves of and observe any such restrictions.

The information in this website is being made available on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the UAE Central Bank, the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in the UAE or elsewhere in the Middle East.

The information in the following website should not be construed as investment advice or a recommendation for the purchase or sale of any security. The value of investments and the income from them may fall as well as rise. Principal Investor Management (DIFC) Limited and the other member firms of Principal (collectively, the “Firms”) do not guarantee any investment results and there can be no assurance that the strategies employed will improve investment performance, and make no guarantee that a client’s investment objectives will be achieved and no warranties or representations, expressed or implied, are made by the Firms concerning the benefits of these strategies discussed herein. The information in this website has been developed internally and/or obtained from sources that the Firms believe to be reliable; however, the Firms do not guarantee the accuracy, adequacy or completeness of such information and are not responsible for any errors or omissions. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

This website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information it contains does not take account of any investor’s investment objectives, particular needs or financial situation. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision. You should consider whether an investment fits your investment objectives, particular needs and financial situation before making any investment decision.

Nothing in this website should be construed as investment, tax, legal or other advice.

The content of this website has not been approved by or filed with the UAE Central Bank or Dubai Financial Services Authority.

Access to this website is only permitted for “Professional Clients” as defined in the Conduct of Business of the Dubai Financial Services Authority’s Rulebook. If you are not a “Professional Client”, you may not access this website and you should select the “Decline” link below.

By selecting the “Accept” button below, and entering this website, you agree to these terms and confirm and represent that you are a “Professional Client”.